If immovable property is situated in India, gains also taxable in India

The first question relates to taxability of amount received on release and relinquishment of tenancy rights, whereas, the second question relates to capital gains on sale of 596 shares and as such do not involve determination of fair market value. As regards the amount received on release of tenancy rights, the tenancy rights are in respect of real estate and would be gains derived from alienation of immovable property. As the immovable property is situated in India, the gains are taxable in India under Article 13.1 of the DTAA. As regard the gains derived from the sale of 596 shares of Parikh Agencies Pvt. Ltd., being other than shares quoted on approved stock exchange, since the value of the shares is derived principally from immovable property situated in India, the same are taxable under Article 13.4 of the DTAA in India.

AUTHORITY FOR ADVANCE RULINGS (INCOME TAX)

NEW DELHI

22nd Day of March, 2012

Mrs. Punnika Parikh, Netherlands

A.A.R. No.1092 of 2011

RULING

The applicant is a Dutch citizen since 1984 and holds a card of Person of Indian Origin since 6.10.2003. The applicant has 1/4th interest in the tenancy rights of a flat in Purnima, 40 C, B.G.Kher Marg, Mumbai, and holds 596 shares in Parikh Agencies Pvt. Ltd, a dormant company holding ownership rights in immovable property in Mumbai. The applicant desired to know her tax liability under the Indian Tax Laws and under the laws of Netherlands in respect of the release of tenancy rights and on sale of the said shares to enable her to file returns of income in India as well as in the Netherlands in respect of these transactions.

2. The following questions were admitted for a ruling from this authority:-

1. Is the amount received for the release and relinquishment of tenancy rights a real estate transaction liable to be taxed under the head capital gain and further, is it to be taxed in India or in the Netherlands?

2. Is it correct that the capital gain tax on sale of shares is to be paid in the Netherlands only and that, the TDS already made on the sale of shares is to be refunded to her by India?

3. The applicant submits that Parikh Agencies Pvt. Ltd. was holding ownership rights in immovable property at Mumbai. Under Article 11 of the Double Taxation Avoidance Agreement (DTAA) entered into between India and Netherlands, the gains derived from sale of shares are taxable in Netherlands, applicant being resident of Netherlands. As regards the capital gains on sale of tenancy rights, these are admittedly taxable in India under Article 6 of the DTAA, the tenancy rights being situated in India. On the other hand, the Revenue states that it is not clear about whether Parikh Agencies Pvt. Ltd. held PiLJtK in the LbuildinK ‘PuPnX3a’ oP iJ sji3X othLP 1PL1 ePty; tLe luRtion oR shares at the rate of Rs.40,000 per share and details about TDS paid of Rs. 1,27,01,960 in FY 2010-11. It had raised an objection that the questions raised involve determination of fair market value of the property.

4. Neither the applicant nor the revenue appeared during hearing under section 245R(4) of the Act.

5. We find that the two questions admitted for a ruling, do not involve determination of fair market value of the property. The first question relates to taxability of amount received on release and relinquishment of tenancy rights, whereas, the second question relates to capital gains on sale of 596 shares and as such do not involve determination of fair market value. As regards the amount received on release of tenancy rights, the tenancy rights are in respect of real estate and would be gains derived from alienation of immovable property. As the immovable property is situated in India, the gains are taxable in India under Article 13.1 of the DTAA. As regard the gains derived from the sale of 596 shares of Parikh Agencies Pvt. Ltd., being other than shares quoted on approved stock exchange, since the value of the shares is derived principally from immovable property situated in India, the same are taxable under Article 13.4 of the DTAA in India.

The questions are hence answered as under:

Ans. 1 The amount received for the release and relinquishment of tenancy rights is liable to be taxed under Article 13.1 of the DTAA in India.

Ans. 2 The capital gains on sale of shares is taxable in India under Article 13.4 of the DTAA. The TDS already paid on the sale of shares is to be allowed credit against any tax demanded by the Revenue, upon its proper verification.